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China may cut reserve ratio further to boost economy

China Securities Journal reported that China may lower banks' reserve requirement ratio further, following a cut on Saturday to achieve a stable increase in economic growth and sizeable credit supply this year.

The paper said boosting domestic demand should become Beijing focal point in setting economic policies. It said China should cut interest rates to stimulate the economy when needed while adjusting banks' reserve requirement ratio and open market operations will remain the central bank's main monetary policy tools.

It said "It may become a norm that the central bank uses repurchase agreements and reverse repurchase agreements to reduce volatility in money market rates.”

China should also give banks more flexibility in lowering interest rates on loans to reduce enterprises' funding costs.

China banks can currently offer loans to enterprises at as low as 90% of the policy loan rate set by the central bank. The benchmark one-year loan rate is at 6.56% now. Other measures the newspaper recommended to boost domestic demand include encouraging banks to lend to emerging industries, small and medium sized enterprises and the far west region of China.

It added that tax reforms, increases in fiscal revenue for social housing and hospitals and opening up more channels for private equity should also be included to ensure stable economic growth.

The People Bank of China said Saturday it will cut the reserve requirement ratio by 0.5 percentage point effective from May 18 which will free up funds to be loaned out by the banking system.

It is the third cut in the reserve ratio so far in the current cycle of monetary-policy loosening, with the previous two cuts in November and February.

The ratio or the level of deposits that banks must hold in reserve rather than lend out, will decline to 20% after the latest cut takes effect.